For most of us, investments involve buying gold, fixed bank deposits and other traditional investment options which offer safety of capital and don’t require you to worry too much. Although they provide a good degree of capital safety, they may not offer returns adequate to beat inflation. Effectively, the value of your capital is getting eroded over time.
For higher returns though, you can look to invest in the stock markets, but many would be quick to claim that there is this high risk of capital reduction in such investments. While that may be debatable, there are always mutual funds coming into our rescue. They offer good returns along with relatively a better safety of capital than the stock markets.
Let’s look at 7 reasons why investing in mutual funds is better than any other investment option.
- Higher returns than the traditional investment options
- Historically, mutual funds have been successful in giving higher returns than the bank fixed deposits, savings deposits, bullying, etc. Most of the mutual funds also manage to beat down the inflation rate and the value of your investment isn’t affected in the long term.
- For example: If you invest Rs.100 in bank fixed deposit for 1 year which gives 7% interest while the inflation rate is at 8%, after 1 year your investment value will become Rs.107. However, in the same period, the cost of goods would inflate to Rs.108, effectively reducing your purchase power.
- Many mutual funds, however, tend to deliver far higher returns – in the range of 15%, 20%, or even more, depending on the ones you pick and the market performance of that time. Sure, the performance is volatile, and not guaranteed, but calculated bets go a long way.
2.A lower degree of risk
- Someone investing in stock market picks few individual scrips of shares and invests on his own discretion. Consequently, these few scrips can experience high volatility and the investor bears a high degree of risk.
- A mutual fund, on the other hand, invests in a wide range of stocks across different sectors, which significantly lowers the risk and provides stable returns as well.
- Mutual funds work on the principle of diversification. They spread your capital across multiple companies, industries, sectors or even different asset classes, which reduces your risk of exposure.
- You can further add on to this advantage. During times of high volatility in the markets, an investor can allocate more percentage of capital into the fixed income funds while during stable market conditions, an investor can reduce their percentage of fixed-income funds and invest more into equity funds.
- This way of diversifying through mutual funds helps investors manage their returns much better than any other investment options.
4.Professionally managed by experts
- Mutual funds are managed by professional fund managers appointed by their fund houses, who have the relevant qualifications and experience.
- Fund managers with their experience and in-depth knowledge can manage the funds more efficiently than an average investor can manage his own portfolio.
- With a minimal percentage of the capital as a fees/commission to the fund managers, investors get to avail the services of experts in managing their investments. For example, Chirag Setalvad of HDFC Mutual Fund handles various categories of mutual funds and has been consistent in achieving more returns than the industry.
5.SIP and SWP
- Through SIP i.e. Systematic Investment planning, investors can invest a fixed amount every month into the mutual funds consistently. This helps in instilling discipline into the investors.
- Also, investors can achieve their financial targets through SIP. A SIP with the combination of the power of compounding can help investors accumulate huge wealth over the long term.
- Through an SWPe. Systematic Withdrawal Plan, you can invest a lump sum amount and later it can be withdrawn or redeemed through periodic payments. SWPs are generally helpful for senior citizens and retirees who need a consistent monthly income
- Gains arising because of the sale of mutual funds are taxed. Short term gains through the sale of equity funds in less than 12 months are taxed at 15%, while long-term gains through the sale of equity funds in more than 12 months are taxed at 10%.
- However, long-term capital gains through the sale of equity funds of less than Rs.1 Lakh are tax-free. Small and middle-class investors are large tax beneficiaries in case of mutual funds.
7.Peace of mind
- All the tasks of research, buying, selling and monitoring of stocks or debts in a mutual fund are performed by the fund managers and the fund houses. Investors just need to monitor their fund performances on time to time basis and can achieve the peace of mind.
- There is no constant worry about share price movements, all things been taken care by the mutual funds. It’s stress-free.
Mutual fund houses have been consistently growing in terms of their Assets Under Management (AUM) and a number of investors. So are the investors, as the technology deployed in the investment, stock market and mutual funds are developing at great speeds. An increasing number of Indians are getting financially educated, thus mutual funds have seen a spurt of growth in the recent past. The liquidity has only risen in the mutual fund market. With all these advantages, mutual funds have become an investment option in today’s scenario which is difficult to ignore.